Rupee poised for appreciation as deficit shrinks, RBI deputy says

The rupee's depreciation trajectory may reverse course as macroeconomic fundamentals improve, the RBI official indicated, pointing to two key drivers of potential currency strength. A contracting current account deficit—the measure of India's trade imbalance and cross-border payments—removes downward pressure on the currency, while strengthening capital flows provide fresh demand for rupee-denominated assets.

Gupta's assessment reflects a broader optimistic view within India's monetary policy establishment about the rupee's medium-term prospects. The currency has faced persistent headwinds from global dollar strength and elevated domestic energy import costs, but officials see these cyclical pressures easing.

The timing of any rupee appreciation remains uncertain, though Gupta suggested the improvement could gather pace during the remainder of the 2024-25 financial year, which runs through March 2025. The outlook hinges on the trajectory of India's external accounts and the relative attractiveness of Indian investments to foreign capital.

Exerts from the RBI leadership have increasingly signalled confidence in India's external stability, underpinning the case for currency strength as global conditions stabilise and domestic economic growth sustains robust capital inflows.